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The Bank of Canada (BoC) has decided to leave its policy rate unchanged at 0.25% as expected. Regarding the loonie, the one-two punch of COVID-19 and US election uncertainty has produced a fresh pullback in risk appetite, dragging CAD with it. A messy US election could inspire a push towards 1.35 in the very short-run, where analysts at TD Securities like fading USD/CAD rallies.  

Key quotes

“The BoC held the overnight rate at the effective lower bound of 0.25% in October as widely expected, while forward guidance continues to pledge that the Bank will remain at the ELB until slack is fully absorbed (which they expect to occur in 2023).”

“The BoC announced they should shift their QE program to focus more on longer-term bonds while at the same time gradually reducing minimum cash purchases of GoCs from $5bn per week to $4bn per week. The program is expected to provide at least as much stimulus as it did previously, which implies steady or larger total duration, echoing the Fed’s Operation Twist.”

“The forward guidance on the overnight rate was unchanged, with the Bank pledging to remain at the overnight rate until slack is fully absorbed (which they expect in 2023). MPR forecasts revealed a 2.1pp upgrade to GDP in 2020 (with a 0.9pp downgrade in 2021) and a 3pp hit to potential output by 2022.”

“For CAD, the BoC has to take a backseat to risk sentiment. The backdrop remains on souring sentiment, reflecting the global COVID-19 spike and the tail-risks of the US election. We think most of this setup underscores a positioning adjustment that will offer fresh opportunities to resell the USD. Still, CAD’s a high-beta currency and it has been trading at fairly wide gaps to our dashboard. 

“Our global risk and growth two-factor framework put USD/CAD at 1.35. The one-two punch of US elections and COVID-19 could help inspire a retest of that level in the very short-run. However, we continue to like fading USD/CAD rallies towards 1.35 and think the next big move.”